Philips Ready to Exit Lighting, Focus on Healthcare

Peter Clarke

25 September 2014

Koninklijke Philips Electronics NV (Amsterdam, The Netherlands) has announced it plans to split the company in two with one part focused on healthcare and consumer lifestyle products and the second on lighting solutions and for which it will look at strategic options.

At a meeting with investors and analysts in London Philips said it will move the lighting solutions business into a separate legal structure and consider various options for alternative ownership structures with direct access to capital markets. The announcement of the plan to separate off the lighting solutions business follows on from a recently announced plan to combine Philips's Lumileds and automotive lighting businesses into a stand-alone lighting components company.

Philips has already effectively exited the electronic equipment and displays sectors where it had been a European market leader and separated off its semiconductor business to form NXP Semiconductors NV (Eindhoven, The Netherlands) in 2006.

The healthcare and consumer lifestyle part of Philips had 2013 sales of about €15 billion (about US$19 billion) while the lighting solutions businesses had 2013 sales of about €7 billion (about US$8.9 billion). Philips said the two companies to be formed under the strategic re-organization would both be allowed to use the Philips brand name.

The transformation of Philips into a healthcare business is being done to reduce costs in what is still a giant organization employing more than 100,000 people worldwide, while serving an increasingly elderly population that are prepared to pay a premium for monitoring, diagnostic and treatment systems that are effective and convenient. Meanwhile lighting components and lighting systems markets have become increasingly competitive with an advantage for those with access to LED manufacturing. Philips said its health technology businesses already have leading positions in oral healthcare, healthcare informatics, ultrasound diagnostics, cardiac care and home healthcare, and serve a total addressable annual market estimated to exceed €100 billion (about $125 billion).

120 years of electric lighting

The new operating structure is set to enable cost savings of €100 million (about $125 million) in 2015 and €200 million (about $250 million in 2016, Philips said. Philips expects to incur approximately €50 million in additional annual restructuring costs over the period 2014 to 2016.

The exit from lighting is poignant because the company was founded in Eindhoven in 1891 by father and son Frederik and Gerard Philips and began by making carbon filament lamps. From their the company migrated to vacuum tube electronics and on to semiconductors but without losing the origins of its business.

"I do appreciate the magnitude of the decision we are taking, but the time is right to take the next strategic step for Philips, as we continue on our transformation," said CEO Frans van Houten, in a statement. "To become the global leader in healthtech and shape the future of the industry, we will combine our vibrant Healthcare and Consumer Lifestyle businesses into one company. At the same time, giving independence to our Lighting solutions business will better enable it to expand its global leadership position and venture into adjacent market opportunities. Both companies will be able to make the appropriate investments to boost growth and drive profitability, ultimately generating significantly more value for our customers, employees and shareholders."

Philips said the lighting solutions business would benefit from being a stand-alone company where it would have improved speed and agility to deliver connected LED lighting systems and services. The growth in LED lighting would more than offset the decline in conventional lighting, Philips said.

For 2016 Philips is targeting a comparable sales growth of between 4 and 6 percent and a return on invested capital of 14 percent.

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